Debt fund investing is a no-brainer. You must invest in debt to cut overall portfolio risk.
But right now debt fund investments is all about WHERE you put your money to work i.e in which specific debt fund category you want to make investments.
You cannot invest in any and all debt funds. You have to focus your investments given that interest rates have started to rise. That’s because debt funds come in all hues, but only a few categories make the investment cut. Here’s what you should know.
There’s a whole lot of changes happening in the debt fund category, so there’s a good reason now to revamp your debt fund investment strategy.
The Reserve Bank of India has taken a U-turn in interest rate policy. Bond funds have a special relationship with interest rates. The Monetary Policy Committee has unanimously voted to raise interest rates by 25 basis points to 6.25 percent. This was widely against the consensus view that the RBI would keep the rates on hold.
The first step towards improving your debt fund game isn’t about investing in debt funds at all, but about how you can get your debt fund duration call right. You must learn how to manage your debt funds appropriately.
IT’S TIME FOR LOW DURATION FUNDS
Re-jigging your bond portfolio doesn’t have to mean a complete re-haul. Just make sure that you swing your portfolio towards short-maturity bond funds that is into funds that hold bonds that will mature in about a year.
If you are looking for a way to have a good debt portfolio, remember there are many options at the short-end side of the market. You can have a look at liquid funds and short-term bond funds.
There’s the accrual strategy. Here you basically hold on to the funds for the duration and you should be able to clear a good return on debt funds. In an accrual strategy, pulling out in the middle could mean losses at your end. Stay the course of the duration.
SAY ‘NO’ TO LONG-TERM DURATION FUNDS NOW
The first thing you got to do is keep out of investing in long-term bond fund investment strategy or keep it in abeyance. Long-duration bond funds get re-priced daily, hence these funds have a high degree of volatility on a daily basis. The longer the duration, the higher the swing in underlying debt holdings.
These funds lose money when interest rates. Yields have tightened a bit in the past three months from about less than seven percent to 7.8 percent. It has taken the zing out of long-term bond funds.
Even a small swing in interest rates can result in a big loss in your bond fund returns. In bond funds where the 10-year paper yields about 7.8 percent, the difference in returns is showing in long term debt gilt funds. And how. This past one year, returns from long debt gilt fund have been below one percent.
If you need income from bonds, it’s better to buy bonds or fixed deposits or monthly income plans of a fixed nature for a year or so from finance companies, markets, etc.
All debt funds are not going to see steady, rising net asset values. Choose wisely.
